A CHALLENGE TO RUSSIAN INDUSTRY

by

Garry Jacobs and Robert Macfarlane

[Article published in the Moscow Business News]

The Russian economy today faces unprecedented difficulties arising from shortages of raw materials, spiraling costs, loss of markets in other republics, falling purchasing power and decreasing demand for products. Many companies are fighting for their very survival. By one recent estimate at least 80% of enterprises are in serious financial trouble. It is natural and almost inevitable that the management of these enterprises lose confidence in their ability to control their own destiny.

But in our view these very same circumstances present great opportunities for enterprises to improve their performance and to achieve higher levels of profitability, provided they know how to respond constructively and creatively to this rapidly changing economic environment and tap potentials that lie within their own control. We firmly believe that it is possible for Russian companies to convert present losses into profits or profits into much higher profits in a short period of time. We offer a proposal to prove this is true and we challenge companies to accept it.

Russian companies are not the only ones to have ever faced extreme difficulty. Similar conditions have arisen in most countries at one time or another due to economic depression, spiraling inflation, intense international competition, labor unrest and burdensome government policies, such as severe environmental regulations in the U.S. that force chemical companies to spend the equivalent of 250,000 rubles per ton to dispose of solid waste materials from their production process.

The experience of companies around the world is that waiting for the macro-economic environment to improve is the wrong strategy for success during hard times. Instead of being preoccupied with blaming forces beyond their control, successful companies concentrate on tapping the powerful potentials that lie hidden within their reach.

In 1932 the U.S. economy was in the midst of the Great Depression. Unemployment had risen to 25%. Production had fallen by more than 30% due to falling demand. Banks and companies were declaring bankruptcy at an alarming rate. While enterprises in every industry were firing employees and selling their assets in order to cope with this extreme adversity, one medium sized company in the office equipment industry chose a different strategy. Management announced a policy of guaranteed employment for all workers. It asked its production workers how they could be made more productive in their jobs. It urged its marketing division to discover new markets for the companies products. It asked its engineers to improve production quality and efficiency. Over the next five years, other companies in this industry lost more than 25% of their sales and suffered heavy losses. But this company grew by 50%, earned record profits and became the largest company in the industry. Since then this company has increased its sales over 600 times, from $10 million to $60 billion. Today this company is known all over the world as IBM.

The problems of Russian industry can be traced back to management decisions and practices over many years. Companies fail and become bankrupt even when the economy is healthy and growing. In 1981 America's third largest car manufacturer, Chrysler Corporation, was on the verge of bankruptcy. The company had 100,000 employees and annual sales of $12 billion. But over a three year period it had lost $3.3 billion, the largest losses of any company in the history of the world until then. Its manufactured poor quality, high priced, out-dated cars that were no match for Japanese imports. The company had 100,000 cars unsold cars which no customer wanted to buy. It had 40% excess employees. Labor discipline and morale were very poor. And it had absolutely no money in the bank to cover its daily expenses of $50 million.

Lee Iacocca courageously agreed to become Chief Executive of the company, leaving a safe job at Ford Motors, and announced he would not even take a salary until the company becomes profitable. When virtually every expert on American companies predicted that Chrysler would go out of business within three months, we told the company that we were confident that it could recover and become profitable again. Iacocca worked unsparingly to modernize the organization and to improve systems, product design and quality, service, efficiency, communication, coordination, training, discipline and morale. As a result of improved management, during the next three years Chrysler earned profits of $3.3 billion, more than all the money it had earned during the previous 50 years of its operations, and doubled its annual sales to $24 billion.

Even when the entire industry is dying for one reason or another, companies that improve their management can not only survive but even grow and prosper. Last year we were invited into an Indian company manufacturing rayon cord for car tires. While rayon is still used in tires in Russia, it has been almost completely replaced by nylon and other materials in most countries. The former head of the company was a very successful Indian businessman who served as a past President of the World Management Congress. The company was run very efficiently but its sales and profits had decreased to the point where its new owner wanted to close it. Within a short time, we were able to show the management how it could raise its profits four-fold. The owner became so enthusiastic that he decided to invest in expanding the company through a new joint venture.

We have studied the problems and potentials of hundreds of companies in a wide range of industries in the U.S.A., Europe and developing countries like India, and written two books on how to double corporate profits within one or two years time. Five years ago we conducted a study of Bajaj Auto, a large motor scooter manufacturer in India which faced intense competition from over 30 new competitors, including all the leading Japanese companies like Honda and Suzuki. Since then, Bajaj has doubled its sales, increased profits by 6 times, and is today the largest motor scooter manufacturer in the entire world.

It is essential to adjust the methods and techniques to the conditions and culture of each country. But in our experience every company in every country can substantially improve its performance in five major areas: technology, people, market, finance and organization. The last of these is often the greatest potential. Studies of large American corporations have shown that improving the distribution of work within a company, especially at managerial levels, can reduce costs by 15% and double the profits of America's Fortune 500 enterprises. Even in the most advanced companies, we find that systems are often 40 years behind the times. In India they are 150 years behind. New technology cannot work effectively through out-dated management systems. An American manufacturer of industrial molds and dies was threatened by severe competition from Japanese companies offering better quality products for 25% lower price and in half the delivery time. By redesigning his production systems, the America company was able to reduce delivery time from 32 weeks to under 15 weeks and to match the Japanese on quality and price.

The proposal we offer is to work with Russian companies to eliminate losses and dramatically increase profits within 12 to 24 months. Our fees can be paid out of the increased profits provided that we achieve the promised results. Companies that are serious about improving their management and willing for the effort can write to us for further information about the proposal. Please address your inquiries in English to MIRA International, c/o Agrovnesh Consulting, Orlikov per. 3, Block A, Moscow 107139.